This blog is a commentary on contemporary business, politics, economics, society, and culture, based on the values of Reason, Rational Self-Interest, and Laissez-Faire Capitalism. Its intellectual foundations are Ayn Rand's philosophy of Objectivism and the theory of the Austrian and British Classical schools of economics as expressed in the writings of Mises, Böhm-Bawerk, Menger, Ricardo, Smith, James and John Stuart Mill, Bastiat, and Hazlitt, and in my own writings.

Sunday, May 28, 2006

Congressmen no longer read the bills they vote on and thus do not require them to make sense. (The latest example is the passage of a bill by the House of Representatives making “price gouging” illegal while leaving it undefined.) They leave it to the President and the Supreme Court to sort things out.Unfortunately, the present President sometimes gives the impression of being unable to read. And, since 1937, the Supreme Court has refused to read. It has refused to read the one thing it should be reading above all: the Constitution of the United States. Instead, its members now look for inspiration to the decisions of foreign courts.The Sarbanes Oxley Act of 2002 requires corporate executives not merely to read but to certify the accuracy of their companies' financial reports. Why are Congressmen (i.e., both Representatives and Senators) held to a lesser standard? Why are they not required under penalty of perjury to certify that they have read and carefully studied each bill that they vote for? Don't the American people have the right to demand that their legislators know what they are doing?After all, the stakes are far higher in cases of Congressional nonfeasance or malfeasance than in cases of business nonfeasance or malfeasance. In the latter, the most that one can lose is an investment. In the former, what can be lost is human life, and on a massive scale. And it is much easier to avoid the financial losses inflicted by wayward businessmen than it is to avoid the losses inflicted by wayward Congressmen. To avoid the first, it is only necessary to avoid making a bad investment. There is no such simple way to avoid the harm that can be wreaked by the second.Yes, let us agree that there is simply no way for a Congressman to read and understand the torrent of legislation that is proposed in every session of Congress. It is simply too vast. And this is even more true of the absolute enormity of legislation that is enacted by the dozens of government regulatory agencies every year, under the authority that has been delegated to them by Congress. Indeed, the enormity of the job was the main reason for creating the regulatory agencies in the first place and delegating the authority to legislate to them.

But still, one leading and downright terrifying fact stands out. And that is that the people's elected representatives do not know what the government is doing. The government is supposed to be of, by, and for the people. The people's elected representatives are supposed to be in control of that government in the name of the people they represent. That is their job.

The situation we are in, and have been in for several generations, is one in which intelligent, representative government is increasingly impossible, simply because of the sheer size and scope of government. If we want a government that is controlled by our representatives, we need a government that is sufficiently limited in size and scope for it to be humanly possible for our representatives to know and understand what it is doing and what is being suggested that it do.For the people's representatives to regain control of the government, its size and scope must be radically reduced.

A first step should be the refusal to enact any new legislation that the members of Congress are unwilling to swear or affirm under oath that they have read and carefully studied. And along with this, as another preliminary step, the promulgation of any new rule by any regulatory agency should be prohibited except upon that rule having been read, studied and voted into effect by a majority of the House and Senate Committees having jurisdiction over that regulatory agency. Thus, for example, before the SEC or EPA could enact any new rule, a majority of the members of the House and Senate Committees having jurisdiction over them would have to approve the new rule. This measure would effectively place members of Congress in charge of the various regulatory agencies.

Yes, the effect of these proposals would be a radical reduction in the enactment of new laws and new rules and regulations. Exactly that is what is needed if there is to be any hope of the people and their representatives regaining control of their government. As things stand, the government is comparable to a high-speed freight train hurtling down the tracks with no one in the cab of the locomotive and thus with no one to see what lies in front of the train and where it is going. That is our government today: a train wreck, a thousand train wrecks, just waiting to happen.

Thursday, May 18, 2006

This essay originally appeared in Ayn Rand’s The Objectivist, vol. 7, nos. 8 and 9, August and September, 1968.It was posted on May 23, 2006, not May 18.The doctrine of “pure and perfect competition” marks the almost total severance of economic thought from reality. It is the dead end of the attempt to defend capitalism on a collectivist base.

Ironically, that attempt took hold in economics in the late nineteenth century (and has been gaining influence ever since) through the efforts of Victorian economists to refute the theories of Karl Marx on the subject of value and price. The rationing theory of prices was advanced as the alternative to the Marxian labor theory of value. The irony is that the “pure and perfect competition” doctrine is to the left of Marxism.

Marxism denounced capitalism merely for the existence of profits. The “pure and perfect competition” doctrine denounces capitalism because businessmen refuse to suffer losses. The argument of the supporters of “pure and perfect competition” is not that businessmen make excessive profits through any kind of “monopoly,” but that they are “monopolistic” in refusing to sell their products at a loss—which businessmen would have to do if they treated their plant and equipment as costless natural resources that acquired value only when they happened to be “scarce.”

The “pure and perfect competition” doctrine distorts the facts of reality to a greater extent than did the traditional critiques of capitalism. Those critiques recognized that competition is a fundamental element of capitalism, but they denounced it.

Capitalism, they claimed, is ruled by the “law of the jungle,” by the principles of “dog eat dog” and “the survival of the fittest.” The “pure and perfect competition” doctrine proceeds from the same base as these earlier critiques, and is in full agreement with them in their objections to such characteristics of the process of competition as the continuous improvement in products, the variety of products, advertising, and the existence of idle capacity. Both schools regard all these characteristics of competition as a “waste” of “society’s scarce resources.”

But the “pure and perfect competition” doctrine regards these characteristics as “imperfections” and attacks capitalism on the grounds that capitalism lacks competition.

Every industry, it asserts, is “imperfectly competitive” (with the barely possible exception of wheat farming). Every industry is guilty of “monopolistic competition” or “oligopoly.” In the words of Professor Bach:

“There is a spectrum from pure competition to pure monopoly. Where there are a good many sellers of only slightly differentiated products, but not enough to make the market perfectly competitive, we call the situation ‘monopolistic competition.’” And: “Where there are only a few competing producers so each producer must take into account what each other producer does, we call the situation ‘oligopoly,’ which means few sellers.” (George Leland Bach, Economics: An Introduction to Analysis and Policy, 6th ed., Prentice-Hall, Inc., Englewood Cliffs, New Jersey, 1968, p. 337. Bach expresses the same view in the eleventh edition of his book, published in 1987, pp. 376–377, but not as succinctly.)

The concepts of “monopolistic competition” and “oligopoly” are indistinguishable, both in theory and in practice. As examples of “monopolistic competition,” Professor Bach cites Kellogg and Post in the field of breakfast cereals, and RCA and Philco in the field of television sets—even though these industries are fully as “oligopolistic” as the automobile or steel industry. (Even small retail establishments, a more popular example of “monopolistic competition,” can also be classified under “oligopoly,” since there are only a few of a given kind in a given neighborhood.) In any case, these two concepts embrace virtually all industries, except the few that are called “pure monopoly.”

The competition that capitalism is accused of lacking—as a result of “monopolistic competition” and “oligopoly”—is called price competition.

The nature of price competition, as contemporary economists see it, is indicated in another passage in Professor Bach’s textbook:

“Analytically, the crucial thing about an oligopoly is the small number of sellers, which makes it imperative for each to weigh carefully the reactions of the others to his own price, production, and sales policies. The result is a strong pressure to collude to avoid price competition or to avoid it without formal collusion.” (Ibid., p. 361.)

Capitalism is accused of lacking price competition on the following grounds: if there are few sellers in a market, any seller who cuts his price must take into account the fact that the other sellers will match his cut—so he may be better off if he refrains from price cutting; thus prices will not be driven down to the level of “marginal cost” or to the point where they “ration” the benefit of “scarce” capacity.

Consider the evasion entailed in the accusation that capitalism lacks price competition. Every decade, since the beginning of the Industrial Revolution, commodities have become not only better, but also cheaper—if not always in terms of paper money (the value of which has been constantly reduced by the policies of governments), then in terms of the labor and effort that must be expended to earn them. What is it that has made producers lower their prices for the last two hundred years? Blankout.

Actual price competition is an omnipresent phenomenon in a capitalist economy. But it is completely unlike the kind of pricing envisioned by the doctrine of “pure and perfect competition.” It is not the product of a mass of short-sighted, individually insignificant little chiselers, each of whom acts to cut his price in the hope that his action won’t be noticed by any of the others. The real-life competitor who cuts his price does not live in a rat’s world, hoping to scurry away undetected with a morsel of the cheese of thousands of other rats, only to find that they too have been guided by the same stupidity, with the result that all have less cheese.

The competitor who cuts his price is fully aware of the impact on other competitors and that they will try to match his price. He acts in the knowledge that some of them will not be able to afford the cut, while he is, and that he will eventually pick up their business, as well as a major portion of any additional business that may come to the industry as a whole as the result of charging a lower price. He is able to afford the cut when and if his productive efficiency is greater than theirs, which lowers his costs to a level they cannot match.

The ability to lower the costs of production is the base of price competition. It enables an efficient producer who lowers his prices, to gain most of the new customers in his field; his lower costs become the source of additional profits, the reinvestment of which enables him to expand his capacity. Furthermore, his cost-cutting ability permits him to forestall the potential competition of outsiders who might be tempted to enter his field, drawn by the hope of making profits at high prices, but who cannot match his cost efficiency and, consequently, his lower prices. Thus price competition, under capitalism, is the result of a contest of efficiency, competence, ability.

Price competition is not the self-sacrificial chiseling of prices to “marginal cost” or their day by day, minute by minute adjustment to the requirements of “rationing scarce capacity.” It is the setting of prices perhaps only once a year—by the most efficient, lowest-cost producers, motivated by their own self-interest. The extent of the price competition varies in direct proportion to the size and the economic potency of these producers. It is firms like Ford, General Motors and A & P—not a microscopic-sized wheat farmer or sharecropper—that are responsible for price competition. The price competition of the giant Ford Motor Company reduced the price of automobiles from a level at which they could be only rich men’s toys to a level at which a low-paid laborer could afford to own a car. The price competition of General Motors was so intense that firms like Kaiser and Studebaker could not meet it. The price competition of A & P was so successful that the supporters of “pure and perfect competition” have never stopped complaining about all the two-by-four grocery stores that had to go out of business.

Competition is the means by which continuous progress and improvement are brought about. And nothing could be more pure and perfect—in the rational sense of these terms—than the competition which takes place under capitalism.

The ideal of the “pure and perfect competition” doctrine, however, is a totally stagnant economy—the “static state,” as it is called—in which production and consumption consist of an endless repetition of the same motions. (For a valuable discussion of the influence of this “ideal” on contemporary economics, see von Mises, Human Action.)

It is in the name of this “ideal” that the supporters of “pure and perfect competition” attack the constant introduction of new or improved products, the evergrowing variety of products, and the advertising required to keep people abreast of what is being offered.

And only from the standpoint of this “ideal” can one declare that idle capacity is a “waste”—for only in a “static state” would there be no need for any unused capacity.

A capitalist economy is not “static.” Producers know that they must respond to changes in conditions. They endeavor always to have a margin of idle capacity, which can be brought into production if and when it is needed. Under capitalism, the normal state of production requires the possession of extra machines and tools in every industry, to meet every foreseeable change in demand. This is not a “waste,” not any more than the fact that consumers under capitalism own more shirts than the ones they happen to be wearing.

What the “pure and perfect competition” doctrine seeks is the abolition of competition among producers. Its “ideal” is a state in which no producer is able to take any business away from another producer. If a man is producing at full capacity, he cannot meet the demand of a single additional buyer, let alone compete for that demand. And if he is not producing at full capacity and is charging a price equal to his “marginal cost,” he still cannot compete for the demand of any additional buyers because he is forbidden to “differentiate” his product or to advertise it.

The “pure and perfect competition” doctrine seeks to replace the competition among producers in the creation of wealth, with a competition among consumers in the form of a mad scramble for a fixed stock of existing wealth. It seeks a state of affairs in which no additional buyer can obtain a product without depriving some other buyer of the goods he wants—for that is what competition at full capacity would mean. It seeks to make men competitors in consumption rather than in production. It seeks to transform the competition of human beings into a competition of animals fighting over a static quantity of prey. In other words, when it denounces capitalism, it is denouncing the fact that capitalism is not ruled by the law of the jungle.

The supporters of “pure and perfect competition” are aware of the fact that their doctrine is inapplicable to reality. This does not trouble them. Their view is expressed by Professor Wilcox, who observes casually (in a passage immediately following his alleged definition—the list of conditions I quoted earlier):

“Perfect competition, thus defined, probably does not exist, never has existed, and never can exist. . . . Actual competition always departs, to a greater or lesser degree, from the ideal of perfection. Perfect competition is thus a mere concept, a standard by which to measure the varying degrees of imperfection that characterize the actual markets in which goods are bought and sold.”

This “concept” divorced from reality, this Platonic “ideal of perfection” drawn from non-existence to serve as the “standard” for judging existence, is one of the principal reasons why businessmen have been imprisoned, major corporations broken up and others prevented from expanding, and why economic progress has been retarded and the improvement of man’s material well-being significantly undercut. This “concept” is at the base of antitrust prosecutions, which have forced businessmen to operate under conditions approaching a reign of terror.

Such are the effects of mysticism when it is brought into economics. Non-existence has no consequences; but those who advocate it, do.

Wednesday, May 17, 2006

The following essay originally appeared in Ayn Rand’s The Objectivist, vol. 7, nos. 8 and 9, August and September, 1968. The doctrine of “pure and perfect competition” is a central element both in contemporary economic theory and in the practice of the Anti-Trust Division of the Department of Justice. “Pure and perfect competition” is the standard by which contemporary economic theorists and Justice Department lawyers decide whether an industry is “competitive” or “monopolistic,” and what to do about it if they find that it is not “competitive.”

“Pure and perfect competition” is totally unlike anything one normally means by the term “competition.” Normally, one thinks of competition as denoting a rivalry among producers, in which each producer strives to match or exceed the performance of other producers. This is not what “pure and perfect competition” means. Indeed, the existence of rivalry, of competition as it is normally understood, is incompatible with “pure and perfect competition.” If that is difficult to believe, consider the following passage in a widely used economics textbook by Professor Richard Leftwich:

“By way of contrast, intense rivalry may exist between two automobile agencies or between two filling stations in the same city. One seller’s actions influence the market of the other; consequently, pure competition does not exist in this case.” (Richard H. Leftwich and Ross D. Eckert, The Price System and Resource Allocation, 9th ed., The Dryden Press, Chicago, 1985, p. 41.)

While competition as normally, and properly, understood rests on a base of individualism, the base of “pure and perfect competition” is collectivism. Competition, properly so-called, rests on the activity of separate, independent individuals owning and exchanging private property in the pursuit of their self-interest. It arises when two or more such individuals become rivals for the same trade. The concept of “pure and perfect competition,” however, proceeds from an ideology that obliterates the existence of individuals, of private property, and of exchange. It is the product of an approach to economics based on what Ayn Rand has characterized as the “tribal premise.” (Ayn Rand, Capitalism: The Unknown Ideal, The New American Library, New York, 1966, p. 7.)

The tribal premise dominates contemporary economic theory, and is, as Miss Rand writes, “shared by the enemies and the champions of capitalism alike . . .” The link between the concept of “pure and perfect competition” and the tribal concept of man, is a tribal concept of property, of price and of cost.

According to contemporary economics, no property is to be regarded as really private. At most, property is supposedly held in trusteeship for its alleged true owner, “society” or the “consumers.” “Society,” it is alleged, has a right to the property of every producer and suffers him to continue as owner only so long as “society” receives what it or its professorial spokesmen consider to be the maximum possible benefit. As Professor C. E. Ferguson, a supporter of the “pure and perfect competition” doctrine, declares in his textbook: “At any point in time a society possesses a pool of resources either individually or collectively owned, depending upon the political organization of the society in question. From a social point of view the objective of economic activity is to get as much as possible from this existing pool of resources.” (C. E. Ferguson, Micro-economic Theory, 5th ed., Richard D. Irwin, Inc., Homewood, Illinois, 1980, pp. 173f.)

According to the tribal concept of property, “society” has a right to one hundred percent of every seller’s inventory and to the benefit of one hundred percent use of his plant and equipment. The exercise of this alleged right is to be limited only by the consideration of “society’s” alleged alternative needs. Thus, a producer should retain some portion of his inventory only if it will serve a greater need of “society” in the future than in the present. He should produce at less than one hundred percent of capacity only to the extent that “society’s” labor, materials and fuel, which he would require, are held to be more urgently needed in another line of production.

The ideal of contemporary economics—advanced half as an imaginary construct and half as a description of reality, with no way of distinguishing between the two—is the contradictory notion of a private-enterprise, capitalist economy in which producers would act just as a socialist dictator would wish them to act, but without having to be forced to do so. (For an account of the origins of this alleged ideal, see Ludwig von Mises, Human Action, 3rd ed. rev., Henry Regnery, Chicago, 1966, pp. 689-693.) In accordance with this “ideal,” contemporary economics tears the concepts of price and cost from the context of individuals engaged in the free exchange of private property, and twists them to fit the perspective of a socialist dictator. It views the system of prices and costs as the means by which producers in a capitalist economy can be led to provide “society” with the optimum use and “allocation” of its “resources.”

A price is viewed not as the payment received by a seller in the free exchange of his private property, but as a means of rationing his products among those members of “society” or the “sovereign consumers” who happen to desire them. Prices are justified on the grounds that they are a means of rationing, superior to the issuance of coupons and priorities by the government. Indeed, rationing itself is described by Professor George Stigler, in his popular textbook, as “non-price rationing,” prices allegedly being the form of rationing that exists under capitalism. (George J. Stigler, The Theory of Price, rev. ed., The Macmillan Company, New York, 1952, p. 83.)

Similarly, a cost, according to contemporary economics, is not an outlay of money made by a buyer to obtain goods or services through free exchange, but the value of the most important alternative goods or services “society” must forego by virtue of obtaining any particular good or service. On this point, Professor Ferguson writes:

“The social cost of using a bundle of resources to produce a unit of commodity X is the number of units of commodity Y that must be sacrificed in the process. Resources are used to produce both X and Y (and all other commodities). Those resources used in X production cannot be used to produce Y or any other commodity. To use a popular wartime example, devoting more resources to the production of guns means using fewer resources to produce butter. The social cost of guns is the amount of butter foregone.” (Ferguson, op. cit., p. 173.)

On the basis of this concept of cost, contemporary economics holds that the only relevant cost of production is “marginal cost.” As a rule, and roughly speaking, for the concept can only be approximated, “marginal cost” is held to be the cost of the labor, materials and fuel required to produce an additional unit of a product. Their value is supposed to represent the value of the most important alternative goods or services that “society” foregoes in obtaining this additional unit.

The concept of “marginal cost” excludes the cost of existing factories and machines. The reason for this exclusion is that these assets are “here,” they were paid for in the past and, therefore, their cost is not regarded as a concern of “society” in the present.

All prices, according to this view, should be scarcity prices, i.e., prices determined by the necessity of balancing a limited supply against a comparatively unlimited demand.

Supply, in the context of this doctrine, means the goods that are here—in the possession of sellers—and the potential goods that the sellers would produce with their existing plant and equipment, if they considered no limitation to their production but “marginal cost.” Demand means the set of quantities of the goods that buyers will take at varying prices. Every price is supposed to be determined at whatever point is required to give the buyers the full supply in this sense and to limit their demand to the size of the supply.

The essence of this theory of prices is the idea that every seller’s goods and the use of his plant and equipment belong to “society” and should be free of charge to “society’s” members unless and until a price is required to “ration” them. Prior to that point, they are held to be free goods, like air and sunlight; and any value they do have is held to be the result of an “artificial, monopolistic restriction of supply”—of a deliberate, vicious withholding of goods from “society” by their private custodians. After that point, however, the value they may attain is limited only by the importance which buyers attach to them.

On this view, every price is supposed to be an index of the intensity of “society’s” need or desire for a good—an index of the good’s “marginal social utility.”

Thus the tribal view of property, of price, and of cost leads to the view of competition held by contemporary economics.

Competition is viewed as the means by which prices are driven down either to equality with “marginal cost” or to the point where they exceed “marginal cost” only by whatever premium is necessary to “ration” the benefit of plant and equipment operating at full capacity.

This is not competition as it exists in reality. The competition which takes place under capitalism acts to regulate prices simply in accordance with the full costs of production and with the requirements of earning a rate of profit. It does not act to drive prices to the level of “marginal costs” or to the point where they reflect a “scarcity” of capacity. The kind of “competition” required to do that, is of a very special type. Literally, it is out of this world. It is “pure” and “perfect.”

No one has ever defined “pure and perfect competition”—the procedure is merely to present a list of conditions which it requires. A fairly full list of these conditions is presented by Professor Clair Wilcox (who is not an advocate of capitalism) as if it were a definition of “pure and perfect competition.” He writes:

“The requirements of perfect competition are five: First, the commodity dealt in must be supplied in quantity and each unit must be so like every other unit that buyers can shift quickly from one seller to another in order to obtain the advantage of a lower price. Second, the market in which the commodity is bought and sold must be well organized, trading must be continuous, and traders must be so well-informed that every unit sold at the same time will sell at the same price. Third, sellers must be numerous, each seller must be small, and the quantity supplied by any one of them must be so insignificant a part of the total supply that no increase or decrease in his output can appreciably affect the market price. . . . Fourth, there must be no restraint upon the independence of any seller or buyer, either by custom, contract, collusion, the fear of reprisals by competitors or the imposition of public control. Each one must be free to act in his own interest without regard for the interests of any of the others. Fifth, the market price, uniform at any instant of time, must be flexible over a period of time, constantly rising and falling in response to the changing conditions of supply and demand. There must be no friction to impede the movement of capital from industry to industry, from product to product or from firm to firm; investment must be speedily withdrawn from unsuccessful undertakings and transferred to those that promise a profit. There must be no barrier to entrance into the market; access must be granted to all sellers and all buyers at home and abroad. Finally, there must be no obstacle to elimination from the market; bankruptcy must be permitted to destroy those who lack the strength to survive.” (Clair Wilcox, “The Nature of Competition,” reprinted in Joel Dean, Managerial Economics, Prentice-Hall, Inc., Englewood Cliffs, New Jersey, 1951, p. 49. An essentially identical list of requirements appears in the much more recent textbook The Price System by Leftwich and Eckert, op. cit., pp. 39–41.)

To summarize these conditions: uniform products offered by all the sellers in the same industry, perfect knowledge, quantitative insignificance of each seller, no fear of retaliation by competitors in response to one’s actions, constant changes in price, and perfect ease of investment and disinvestment.

To understand the alleged need for all these conditions and what they would mean in reality, it is necessary to project them on a concrete example. This is usually not done at all, and is never done fully—if it were, neither the theory of “pure and perfect competition” nor the rationing theory of prices could be propounded. So I shall use an example of my own, which will not be of a kind used by their supporters, but which will express accurately the meaning of these theories.

Imagine a movie theater with 500 seats. The picture is about to go on; the projectionist, the ushers and the cashier are all in their places. “Society” has the alleged right to the occupancy of 500 seats. If they are not all occupied for this performance, no future satisfaction can be obtained by any storing up of the use of the seats for a future time. The seats, the theater, the film, the necessary workers are “here.” “Society,” supposedly, “has them” and now it demands the full benefit from its alleged property.

If the film is not run, the only thing that “society” can save is the electric current which might be made available elsewhere, or the coal which must be consumed to generate the current. The costs of the theater, the film, the workers are all “sunk costs”—“water over the dam,” as the textbooks say— and, since “bygones are bygones,” the only thing which counts for “society” now is the cost of the electric current.

The theater, according to the tribal-rationing theory, should charge an admission price which will guarantee the sale of 500 tickets for the performance. If droves of people are standing in line for admission, it should raise the price to whatever point is required so that only 500 people will be able to afford it. If all the people in line have identical incomes, the same medical disabilities, and natures of equal sensitivity, such a price, supposedly, will mean that the 500 people who want to see the film most, will see it. If they are unequal in these respects, that is already supposed to be an “imperfection,” as Professor Wilcox would say, in the justice of the “market mechanism.”

If, however, there are few people standing in line, the theater should begin reducing its admission price. It must keep on reducing its admission price until it has attracted 500 customers. If an admission price of only two cents is required to get this many customers, then, supposedly, that is what should be charged, provided only that the revenue brought in at the box office covers the cost of the electric current.

If the theater persists in charging its standard price of, say, one dollar, at which it sells less than 500 tickets, then, according to the tribal-rationing doctrine, it is guilty of “administering” its price and of “monopolistic restriction of supply.” It is engaged in a process of “price control”—in violation of the “laws of supply and demand”—and in creating an “artificial scarcity” of seats by “monopolistically” withholding a portion of its supply from the market to maintain a high price on those seats for which it does sell tickets.

If the theater cannot sell 500 tickets even at one cent per ticket, then, according to this theory, it must either open its doors for free or cancel the performance. In this case, a theater seat is, allegedly, a free good—it is no longer “scarce” in relation to the demand for it, and so there is no longer any need for a price because there is no longer any need to ration theater seats. If there are 100 people who want to see the movie and who are prepared to make it worth the theater owner’s while, he should perhaps run the film—contemporary economics would hold—provided he sells the remaining 400 tickets at whatever price is required to unload them, including zero. This, however, would be another “imperfection” in the “market mechanism”—price discrimination. The “ideal solution” in such a case, it is alleged, would be to have the government nationalize the theater, charge nothing and subsidize the loss.

In the process of adjusting its price to attract customers, the theater must not, of course, send anyone out in the street to tell people about the movie it is playing or the price it is charging. That would be another “imperfection”— advertising. Advertising, according to this theory, is a wasteful and vicious means of “demand creation”—it makes the “consumers” act differently than they really want to act. So, as the theater is reducing its price, it must be careful not to be too obvious about it. Simply changing the price in the cashier’s window should be enough.

However, while advertising by the theater is an “imperfection,” “perfection” requires that all potential customers of the theater possess perfect and instantaneous knowledge of its price changes and of the picture it is showing. It is another “imperfection” in the operation of the “market mechanism” if people about to enter other theaters, or riding in their automobiles, or making love, do not receive instantaneous communication of the price changes, so that they may speedily alter their plans. And, presumably, it is an “imperfection” if they have not already seen all the movies many, many times—to be perfectly informed about them.

Because the theater owner wants to “maximize his profits,” he will not act in accordance with the theory’s tribalistic precepts. However, he would, it is argued, if knowledge were perfect and automatic, if people did race back and forth between theaters in response to penny price differences, and if a number of further conditions were also fulfilled. If, for example, there were 401 identical theaters in the same neighborhood, all showing the same movie, and all in the same position with regard to empty seats, then, it is argued, the cunningly clever, “profit-maximizing” businessman would reason as follows: “At my standard price of one dollar, I can sell only 100 tickets today. But if I charge 99.999 . . .9¢ (it is a standard assumption of the theory that all economic phenomena are mathematically continuous and thus capable of treatment by calculus) I can sell all 500 tickets. For in response to this insignificant price change, which is infinitely close to my present price, I could attract away one customer from each of the 400 other theaters. This would be very good for me, and none of the other theater owners would really notice the loss of just one customer, and thus no one would match my lower price. So that is what I will do.”

The same thought, however, will be racing simultaneously, it is assumed, through the heads of the other 400 theater owners, and so everyone’s price will be trimmed just so much, and no one will end up with any additional customers drawn from other theaters. Each theater may attract one percent of an additional customer who otherwise would not have gone to the movies, but that is all.

The same process is repeated at the infinitesimally lower price, as each theater owner seeks to “maximize his profit,” led by the idea that his insignificant price change will draw an unnoticed amount of business from each of many competitors, who will not reduce their prices in response to his action. This process of infinitely small price reductions is supposedly performed with infinite rapidity—presumably through the “automatic market mechanism”— and so, instantaneously, the price is brought down either to marginal cost or to the point where one’s theater is jammed to capacity, which circumstance alone, in the eyes of the theory’s supporters, would justify the price being above marginal cost.

According to the theory of “pure and perfect competition,” the large number of sellers is the main condition required to drive prices to “marginal cost,” or else to the point where they reflect a “scarcity” of the capacity that is “here.” If the individual seller were a significant part of the market and were in a position to handle a major part of the business done by his competitors, then, supposedly, he would never cut his price because he would know that as a result of his action others will lose so much business that they will have to match his cut and that he will thus be left basically only with the lower price. When there is a large number of small sellers, every price cut is also matched, but, the argument is, not because of one’s own price reduction, but because the other sellers are led to cut their prices independently, guided by exactly the same thought.

The significance of all sellers having an identical product is supposed to lie in the greater responsiveness of customers to price changes. If each theater is playing a different movie, customers are not likely to shift their business among the various theaters in response to infinitesimal price differences, and so a theater owner will have less incentive to trim his price. The significance attached to perfect knowledge is similar.

This portrait of the economic world of perfection is not yet complete, however. There remain two other major requirements if “society” is to derive the maximum benefit from its “scarce resources.” It must be possible, as Professor Wilcox puts it, for investment to “be speedily withdrawn from unsuccessful undertakings and transferred to those that promise a profit. There must be no barrier to entrance into the market . . .” This condition would be achieved if movies were shown in tents, with projectors using candlelight instead of electricity. Then, whenever demand changed, theater owners would merely have to unfold or fold up their theaters, and light or blow out their candles.

This would be “perfection,” but not quite in its full “purity.” For in addition, “the market price,” as Professor Wilcox says, “uniform at any instant of time, must be flexible over a period of time, constantly rising and falling in response to the changing conditions of supply and demand.” This would be achieved if, after leaving the theater and going to a restaurant for dinner, one were not given a menu, but were seated in front of a ticker tape—and were offered a futures contract on dessert; and if afterward, on leaving the restaurant and walking back to one’s apartment, one would not know whether one could afford to live there that night, or whether the rentals of penthouses had collapsed. Only then would the world be “purely perfect.”

Thursday, May 11, 2006

In today’s New York Times, Robert H. Frank, who is described as “the co-author, with Ben S. Bernanke, of `Principles of Economics,’” writes that Galbraith should have won the Nobel Prize—for the ideas expressed in the The Affluent Society.

In case anyone needs a refresher about Galbraith, and the fascistic nature of his ideas, be sure to see my "Galbraith's Neo-Feudalism," which recently appeared on this very blog.

What makes this matter important is that it almost certainly sheds light on the thinking of Bernanke himself. Call it guilt by association if you wish, but I don't see how anyone can write a textbook with someone else and not be in agreement with him on at least the great majority of points pertaining to the subject of the textbook, which in this case, of course, is the principles of economics. Until I hear to the contrary from Bernanke, I have to assume that his views about Galbraith don't radically differ from those of his co-author. Perhaps he should step up and give a statement on the subject, to make clear where he stands.

It's not a comforting thought having someone in a position to wreak havoc on the economic well-being of the American people and likely being an admirer of an author who had no compunctions about doing precisely that if it appeared to serve the interests of the State. Bernanke can wreak havoc with his powers of money creation, and it looks like he's already started to do so. He needs to assure the American people that he holds no brief for Galbraith.

If there were any other men of courage and principle in Congress besides Ron Paul, Bernanke would be brought before Congress and called upon to do so.

Wednesday, May 10, 2006

Does gasoline at 10 cents a gallon and falling sound impossible in today’s world? Well, if you think it’s impossible, you’re wrong. Because that’s where gasoline actually is, and it looks like it’s going even lower.

Of course, it’s not 10 cents a gallon in today’s paper money. But it is 10 cents a gallon in the Constitutional money of the United States, which is gold coin and bullion.

Gold is now at $700 per ounce, and rising. Above is a picture of a $20 United States gold coin known as a Double Eagle. If you look carefully, at the bottom of the coin, you can actually see where it says “Twenty Dollars.”

This coin contains approximately one ounce of actual gold, which means that at today’s market price of gold, it’s worth $700. And this means that one gold dollar is worth $35 of today’s paper dollars. And that means that one gold dime is worth $3.50 in today’s paper money. This last, of course, is roughly what a gallon of gasoline costs in today’s paper money. Which means that a gallon of gasoline costs just 10 gold cents.

So why does a gallon of gasoline cost $3.50 in the paper money? Well, one explanation is that we’re expressing the price of gasoline in terms of a money that is itself very cheap and getting cheaper. Just think: if $20 gold dollars are worth $700 paper dollars, one paper dollar is worth only one thirty-fifth of a gold dollar. That’s less than 3 cents. It shouldn’t be surprising that buying things with 3-cent dollars is going to require a lot of such dollars.

The key point here is that our money is getting cheaper and that’s why prices are rising. Don’t be surprised if in the future, gasoline is a lot more expensive in paper money than it is today and, at the same time, cheaper than it is today in our Constitutional gold money. Look for $5 per gallon gasoline in the paper and 7 cent per gallon gasoline in gold. That’s a real possibility.

Monday, May 08, 2006

A truly Orwellian op-ed piece in The New York Times of May 6, says of Bolivia’s nationalization of the natural gas industry in its territory:

Nor is this a classic nationalization in the sense of the confiscations that took place in the region in the 50's and 70's. In those days, Latin American governments expropriated everything and kicked out the companies the next day. This time Bolivia will exert greater control over the companies, including significantly higher taxes and 50 percent-plus-one state ownership, but Mr. Morales has pledged to create an environment conducive to private profit-making, and the government has repeatedly stated that it is a "nationalization without confiscation," with no expulsion of foreign companies nor expropriation of their assets.

To The Times’ writer, these mind-boggling contradictions are so self-evident and reassuring that he feels a need to explain why the Bolivian army was used to impose this "nationalization without confiscation" that is profitable to its victims. Not being a real confiscation, but a source of profit to its victims, the use of the army and the presence of its deadly weapons was necessary merely as a show “to placate masses of radicalized Bolivians who demand `confiscation without compensation’ to the companies.” This last, of course, is a policy very different from that of Mr. Morales, who merely takes property in exchange for nothing.

Wednesday, May 03, 2006

The above headline, “Energy Crisis: Many Paths but No Solutions,” appears on page one of the print version of The Times’ National Edition. I can’t find it on the web version of The Times, however. (To wit: “Your search for Energy Crisis: Many Paths but No Solutions in all fields returned 0 results.”) Perhaps it was withdrawn to avoid embarrassment.

The headline should be embarrassing because it suggests either gross dishonesty or gross stupidity. This is because the solution to the energy crisis is so blindingly obvious. The solution is: allow the oil companies to drill for oil—in Alaska, in the Gulf of Mexico, off the coast of California, on all the land mass of the United States now set aside as “wild-life preserves” and “wilderness” areas. Allow the construction of new atomic power plants! Stop interfering with the strip mining of coal! Stop interfering with the construction of refineries, pipelines, and harbor facilities necessary to the supply of oil and natural gas! This will increase the supply and reduce the demand for oil (this last because substitutes for it will be more readily available). All this can be summed up in very few words: Politicians and environmentalists, get the hell out of the way!Instead, we are told that the oil companies are responsible for the scarcity of oil and its high price and should be punished for it. No! The truth is that the environmentalists and the politicians who support them are responsible.

Perhaps they will claim that they act out of fear: the fear of rising sea levels a hundred years from now. If that’s the reason, then they should say so. They should say that the energy crisis could easily be solved but that they are more afraid of flooding in Bangladesh in a hundred years than of Americans not being able to afford to drive their cars and heat their homes today. Let them have the honesty to say that this is why they choose to prevent the energy crisis from being solved.

Tuesday, May 02, 2006

ALBATROZ (an internet identity): "And I would like to repeat my challenge to all of you:"Would anyone be so kind as to tell me in which countries poverty was eliminated by means of your (Austrian) enlightened theories?..."MY REPLY: Taking "Austrian" economics in its political application to mean private ownership of the means of production and respect for individual rights, including property rights, the answer is (and this should be understood as only a partial list):Great Britain, the United States, Canada, Australia, New Zealand, France, Belgium, Holland, Germany, Switzerland, Denmark, Norway, Sweden, and more recently, Japan, South Korea, and Taiwan.

In these countries, thanks to the substantial application of the free-market principles of Austrian economics (and before that, Classical economics), saving and capital accumulation were tremendously encouraged along with scientific and technological progress. On this foundation the productivity of labor rapidly increased, resulting in more abundant supplies of food, clothing, and housing per capita, and improved sanitation and hygiene. As a result infant mortality radically declined, life expectancy greatly increased, the average person became able to afford to work fewer hours, child labor was progressively eliminated, and for the first time in human history, it became possible for the average person to have access to books, music, art, and education.Please let me know if you have any further questions.

Yesterday’s New York Times carries a piece by op-ed columnist Paul Krugman called “Death by Insurance.” It’s a rant in favor of the "single-payer system," i.e., explicit socialized medicine along the lines of Canada and other countries. The article concludes with the words:

So here we are. Our current health care system is unraveling. Older Americans are already covered by a national health insurance system; extending that system to cover everyone would save money, reduce financial anxiety and save thousands of American lives every year. Why don't we just do it?

TORONTO, Feb. 19 — The cracks are still small in Canada's vaunted public health insurance system, but several of its largest provinces are beginning to open the way for private health care eventually to take root around the country.

Last week Quebec proposed to lift a ban on private health insurance for several elective surgical procedures, and announced that it would pay for such surgeries at private clinics when waiting times at public facilities were unreasonable.

The proposal, by Premier Jean Charest, who called for "a new era for health care in Quebec," came in response to a Supreme Court decision last June that struck down a provincial law that banned private medical insurance and ordered the province to initiate a reform program within a year.

The Supreme Court decision ruled that long waits for various medical procedures in the province had violated patients' "life and personal security, inviolability and freedom," and that prohibition of private health insurance was unconstitutional when the public health system did not deliver "reasonable services."